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S&P Cuts Volkswagen's Credit Rating After Scandal

FRANKFURT, Germany—The international credit rating agency Standard and Poor's on Monday cut the long-term debt rating of German auto giant Volkswagen in the wake of the pollution-cheating scam involving its diesel vehicles.

S&P said in a statement it was downgrading VW's long-term debt rating by one notch to A- and could cut it "by up to two more notches" again in future in face of the "wide-ranging negative credit consequences, following its admission that it installed software designed to manipulate diesel engine exhaust emissions in 11 million vehicles."

"The downgrade reflects our assessment that VW has demonstrated material deficiencies in its management and governance and general risk management framework," the analysts said.

"We believe that VW's breach of U.S. environmental law and potential other laws outside the U.S. represents a significant reputational and financial risk to VW over the medium term," the statement continued.

Last month, VW became embroiled in the biggest scandal in its history, when U.S. authorities accused it of fitting diesel cars with devices that can switch on pollution controls when they detect the car is undergoing emissions testing.

They then switch off the controls when the car is on the road, allowing it to spew out harmful levels of emissions.

VW has already said it will set aside 6.5 billion euros ($7.4 billion) in provisions in the third quarter, but its new chief executive has said that sum would only cover the costs of repairs, and that much more was needed to meet potential fines and damages arising from any lawsuits.

"The costs of remediation, compensation, litigation, and potential fines could... be substantial and well in excess of this level," S&P said.

The analysts acknowledged that the full facts and consequences of the deception "may not be known for months, even years. We expect VW to experience a negative impact on its sales volumes, prices, and margins."

VW, the world's biggest automaker in terms of sales, faces a growing tangle of legal threats in the wake of the scandal.

Fitch said it did not expect the US Environmental Protection Agency to impose the reported maximum fine of more than $18 billion and said VW was financially strong enough to withstand the storm.

"We expect VW's brand image and reputation with regulators and consumers worldwide to be seriously undermined by this crisis although the magnitude and length of the operational and financial effect is difficult to assess," Fitch said last month.

Investors took the news of the S&P downgrade in their stride and the shares were showing a gain of 1.59% in late afternoon trading on the Frankfurt stock exchange.

After the revelations initially wiped out more than 25 billion euros of VW's market capitalization in two weeks, the carmakers have bounced back strongly in recent days.

On Friday, VW shares surged more than 8%, sparking speculation over a "mystery" buyer snapping up the shares.